Transfer of business without loss of control

Mainstream

Transferring a business by inheritance is not writing a will. This is the design of the asset management system for 20-30 years ahead.

The question is not how to distribute the shares fairly among the children. The question is whether the business will lose control at the time of the change of generations.

Effective succession planning is based on three tests:

1. Will there be a single decision-making center after the founder leaves?
2. Whether assets are protected from forced fragmentation under family or inheritance law.
3. Is there a mechanism for resolving deadlocks between heirs?

If these three issues are not worked out in advance, a business built over decades can be paralyzed by corporate conflict, split or sold at a non-market price in just a few years after a change of ownership.

When it is necessary to plan for continuity

System Succession Planning is required if:

• the business or holding structure is located in several jurisdictions;
• The owner’s assets include operating companies, real estate and investment portfolios in the EU and beyond;
• several children in the family, including minors or from different marriages;
• Potential heirs have different citizenship or tax residency.
• There is no obvious successor among the heirs.
• part of the assets is located in countries with a mandatory share in the inheritance (forced heirship);
• The owner wants to keep the business under the management of professional management, ensuring the income of the family.
• There is a risk of conflict between heirs or between heirs and current management.

The mistake most business owners make

Many people start with the question:

How to make a will correctly?

That's the wrong first question.

The right question is:

What ownership and management structure will ensure the safety of the business, regardless of what is written in the will or family law of the testator’s country of citizenship?

Sometimes the best result is the lifetime transfer of assets to the structure (trust, private foundation). Sometimes, it is a corporate contract restructuring. Sometimes it is a combination of a holding company in a neutral EU jurisdiction with a multi-level corporate governance.

Strategy instead of will

Step 1. To carry out an inventory of assets

The first thing to do is not to assess the shares of the heirs, but to make a map of the assets.

Key questions:

• Where exactly are the companies, accounts and real estate located?
• Who is the nominal owner (individual, family holding)?
• Applicable right to each asset (lex situs)
• Tax residency of the current owner and beneficiaries;
• Spousal property regime.

Without this card, it is impossible to design a legally sustainable plan, since the rules for the inheritance of movable and immovable property, as well as shares in companies, can be regulated by the law of different countries.

Step 2. Determine the center of vital interests and hereditary status

Inheritance law (Regulation No. 650/2012) generally applies the law of the country of the testator's last habitual residence. However, this rule can be changed by choosing the right of citizenship (professio juris).

This has an impact on:

• the circle of obligatory heirs;
• the size of the mandatory share;
• the possibility of exclusion of the heir from the management;
• admissibility of trusts and funds;
• the validity of joint will and inheritance contracts;
• The authority of the executor.

An error at this stage leads to the fact that the created structure of the trust can be successfully challenged by the heir with reference to his mandatory share by law of the testator’s country of residence.

Step 3. Choose the right management structure (not ownership)

Property rights and management rights are not the same thing.

Succession Planning is designed to transfer economic benefits to heirs, but retain operational control in the hands of management or one of the heirs.

Tools:

• A family holding company with several classes of shares. Voting shares to the successor-manager, privileged non-voting shares to the rest of the family.
• The Foundation (Stiftung/Private Foundation) Distributed in Austria, Liechtenstein and other jurisdictions. The business belongs to the foundation, the heirs are the beneficiaries, and the board is run.
• Trust with a protector. The legal owner is the trustee, and the protector (such as a trusted family adviser) has veto power over key decisions.
• Limited liability partnership. The general partner manages, the limited partners make a profit.

Step 4. Check the corporate contract and charter

The charter and the corporate contract should be written not for the moment of foundation, but for the moment when the key owner will not become.

Key provisions:

• Buy-Sell (purchase and sale of shares) between the heirs;
• deadlock resolution (getting out of the deadlock): Russian roulette, Texas shooting, mediation with a mandatory decision.
• restrictions on the alienation of shares to third parties (ROFR, tag-along, drag-along);
• the procedure for appointing and dismissing directors;
• qualified majority or unanimity on strategic issues (asset sales, M&A, dividend policy);
• veto power for non-participant shareholders (protection against blurring and unfair transactions);
• Regular reporting and auditing are required.

Step 5. Protecting the business from splitting shares

The greatest threat to manageability occurs when the deceased owner’s shares are automatically divided between multiple heirs or spouses by law.

Protection measures:

• lifetime contribution of shares in one corporate structure that is not subject to division;
• option to buy out a share from “minority” heirs;
• Restriction of voting rights for heirs who are not involved in operating activities;
• transfer of shares to an irrevocable discretionary trust whose beneficiaries are all family members, but the trustee remains the single voting shareholder.

Step 6. Appointing “transitional” management

The death of the founder is always a shock to the business. Counterparties, banks and employees are waiting for clarity.

It is necessary to pre-assign:

• Corporate Executor with clear authority
• the interim CEO or transition board;
• Contact point for banks and key partners.

These persons must be named and instructed before the event occurs, and their powers must automatically take effect in accordance with the documents of the structure and not require judicial approval by heirs.

Step 7. Recognition of EU regulations and conflict of laws

It is critical for the European Family Office to choose a structure that is resistant to challenge.

Priority is given to jurisdictions that:

• do not automatically apply foreign rules on mandatory share (or limit them);
• recognize the concept of lifetime transfer without the right of challenge;
• have developed legislation on trusts and funds;
• are located in the EU (Cyprus, Malta, Austria, Liechtenstein, Luxembourg) or in EU-related jurisdictions.

It is necessary to analyze the interaction of the law of structure and the law of residence of the testator (especially if it is in a country with a forced heirship regime, for example, France or Germany).

Step 8. Develop and implement a Family Constitution

It is an optional but powerful tool for families with multigenerational businesses.

The family constitution describes:

• family values and mission;
• criteria for the next generation of business entry (education, on-the-side experience)
• Dividend and Reinvestment Policy;
• the procedure for the sale of shares by family members;
• Family Dispute Resolution (Family Council)

If there is a properly structured corporate contract that refers to the Family Constitution, this document is transformed from a declarative into a legally significant one.

Step 9. Choose a neutral fork of jurisdictions

Successful succession plans are often based on the principle of separation.

This fork makes it more difficult to attack the entire structure by a single disgruntled heir, creditor or tax authority in one jurisdiction.

Step 10. Regularly review the plan

The succession plan cannot be static.

It shall be revised when:

• Change of tax residency of the owner or key heirs;
• changes in European regulation (e.g. the EU directives on ATAD tax avoidance);
• purchase or sale of a business;
• Changes in the composition of the family (marriage, divorce, birth, death, loss of legal capacity);
• Identifying a new conflict of interest in the family.

A formal, documented review of the plan every 2-3 years is recommended.

Trust, fund or holding: pick

The choice does not depend on the overall fashion for the instrument, but on the family composition, asset class and personal goals of the founder.

How to Strengthen Structure Before a Crisis

The best Succession Plan is implemented when the owner is capable, the business is stable, and there is no conflict.

It is desirable to include in the international structure:

• a two-class system of shares/shares;
• Corporate agreement with the Buy-Sell mechanism;
• an irrevocable trust or private foundation for the ownership of assets;
• Inheritance contract (in permitted jurisdictions)
• the choice of applicable law and jurisdiction for disputes between heirs;
• mandatory mediation before arbitration;
• clear rules for the appointment of members of the Board of Directors and their qualifications;
• restriction on the transfer of shares to spouses and property owners;
• a mechanism for financing the purchase of shares (life insurance key man);
• Plan B in case neither child is ready to run a business (preparing to sell through M&A).

Common mistakes in succession planning

1. The will distributes shares, but does not resolve the conflict between three heirs-co-owners. Management is lost immediately.

2. If assets are acquired in marriage and are not structured, half may go to a surviving spouse who is not involved in the business.

3. Equal signature rights without a deadlock resolution mechanism paralyzes the company at the first strategic disagreement.

4. Too early transfer of voting shares can leave the founder without leverage in the wrong decisions of the heirs.

5. The Russian will for shares of a Cyprus holding company will not work without interfacing with the corporate documents of the holding and the applicable law.

6. In continental Europe, children have the right to a mandatory share in the inheritance. The transfer of assets to a trust can be challenged as violating their rights if it was not carried out 5-10 years before the death.

7. The plan’s lack of stress test should be tested on the model: What happens if the founder and successor die at the same time? What happens if one of the heirs wants to “cash” his share?

Checklist of the business founder

Before you start Succession Planning, you need to answer 15 questions:

1. Who are the ultimate beneficiaries of the assets?
2. In which jurisdictions are the business units located?
3. What law governs the transfer of shares by inheritance?
4. Is there a risk of forced heirship rules?
5. Is there a corporate contract and what does it say about the death of the participant?
6. Who will make the operational decisions during the transition?
7. Who are the heirs willing and able to run the business?
8. How will the payment of heirs not involved in the business be financed?
9. Are the assets jointly acquired by the spouses?
10. Is there a trust, foundation or other entity that owns shares?
11. Does the statute contain a mechanism for resolving deadlocks?
12. Is it possible to buy a share from the heir?
13. Where disputes between heirs will be resolved: State court or arbitration?
14. Is there protection against the dilution of shares?
15. Has a tax analysis been done on the transfer of shares during life and after death?

What a Strong Succession Strategy Looks Like (5 Levels)

1. Asset Mapping & Legal Audit Asset Inventory and analysis of current documents (charters, contracts, marriage contracts) for vulnerabilities.

2. Governance Design Designing a corporate governance system, stock classes, entry and exit rules.

3. Structural Implementation: The implementation of holdings, foundations, trusts in neutral and stable EU jurisdictions.

4. Family Protocol: Developing a family constitution and policies synchronized with the corporate structure.

5. Contingency & Review Stress testing of the plan, training of successors and regular formal audit of the plan.

Without the fifth level, the plan ceases to work within 3-5 years after its creation.

FAQ

Can you take away the heir’s share in the business, leaving him only income?

Yes, through a preferred non-voting share arrangement or through a structure where the heir is only the beneficiary of the trust/fund, not the shareholder. This is permissible if it does not violate the mandatory rules on the mandatory share.

Where is the best place to set up a family fund to protect your business?

The choice depends on the composition of the assets and the tax residency of the family. The jurisdictions of Liechtenstein, Austria, and Cyprus or Malta are often used for holding purposes. The key criterion is the jurisdiction’s respect for the “gap” between ownership and management.

What happens if the heirs don’t agree with the plan?

The plan must be legally binding before a conflict occurs. The corporate contract and the trust deed shall contain a dispute resolution mechanism (mediation, arbitration), which excludes state courts at the place of residence of the heirs.

When should planning begin?

5-10 years before the proposed transfer of control. Early planning minimizes the risks of challenging on the basis of the violation of the mandatory share and allows for tax-efficient migration of assets.

Can the heirs be required to work in business?

You can’t force them to work, but you can create a system where only those who meet the criteria (education, seniority, full-time employment) get access to voting positions and distribution of additional profits.

Related services

• International Wealth Planning & Family Office Structuring
• Corporate Governance & Shareholder Agreements
• Private Wealth, Trusts & Foundations
• M&A and Business Succession Advisory
• Cross-Border Tax & Estate Planning
• Asset Protection Strategy

Related material

• Private foundations in Europe: Review of key jurisdictions
• How to Protect Your Business From Divorce and Inheritance
• Corporate Executor: Who will manage the company during the transition period
• Family constitution: How to Turn Family Values into a Working Document
• European Inheritance Regulation No. 650/2012 case-case
• Multi-Shareholding as a Succession Planning Tool
• Tax risks in transferring business to a trust
• How to choose a trust protector for a family business
• Restructuring assets before the generational change
• Deadlock Resolution in the Family Business: case-cases

Conclusion

Transferring international business without losing control is not the final act of signing hereditary papers, but a continuous process of structural management that begins long before the change of generations.

A strong position is not built on the hope of goodwill of the heirs, but on the impeccable architecture of ownership and management.

In European jurisdictions, the success of a business transition is not determined by how fairly the shares are divided. The winner is the family that has designed a single center of will for business assets, protected this center from external encroachments and personal conflicts, and created the rules of the game that are binding for all generations.